This Investment’s A Little Strange

| April 13, 2010 | 0 Comments

More than two decades ago, my grandfather started teaching me about the stock market.  I remember looking at a copy of the Wall Street Journal.  I was amazed at all the stocks you could buy.

I devoured that newspaper like I hadn’t eaten in months.

I read every article twice and asked countless questions.  I was hooked on the markets.  Reading that paper, I uncovered a number of interesting things.  I realized the market includes a lot more than stocks.

You can buy bonds, commodities, options, and currencies (just to name a few).  I had to know more about these other types of investments.  Over the years, I’ve learned about many different investment types.  One that’s always held an interest for me is Real Estate Investment Trusts or REITs.

Recently I found a unique investment in the REIT industry.

But first, what is a REIT?

REITs might seem complicated… but at their heart, they’re really simple.  A REIT is essentially a company with a special tax designation (I’ll get to that in a moment).  The REIT raises money and goes out and buys real estate.

The REIT operates the property.  They’ll handle everything from leasing space to collecting rent and paying operating expenses.

Most of the profits are sent to the REIT shareholders as dividends.  This is where the special tax designation comes in.  To operate as a REIT, the company must pay out at least 95% of their profits to investors every year.

In exchange, the company doesn’t have to pay taxes on earnings.

That tax savings is huge… and it gets passed along to investors.

Now, you’ll realize REITs are a tad bit more complicated… but in a nutshell, that’s how they work.

So why would you want to buy a REIT?

I can think of several reasons.

First, it gives you great exposure to real estate.  You can own a piece of the local mall or hotel.  Something you might not normally be able to afford on your own.  You also avoid having to deal with tenants, leases, collecting rent checks, or repairing leaky toilets.

Second, REITs usually have robust dividend yields.

Remember, REITs distribute a big chunk of their earnings back to shareholders.  If you’re looking for a steady stream of cash flow, REITs are often a good source.

Third is appreciation.

Successful REITs are investing in real estate that’s going up in value.  The longer they hold their real estate, the greater their value.  As the value of the real estate goes up, the value of your shares should go up as well.

As you can see, REITs provide exposure to real estate, offer a nice dividend, and have the potential to appreciate in value.

You can buy all different types of REITs.  Some focus on apartment complexes, others buy warehouses and industrial property, and some even buy hospitals.  REITs often specialize in the types of real estate they’re buying.

I recently uncovered a most interesting REIT.

This REIT owns movie theaters!

Entertainment Properties Trust (EPR) goes out and buys the real estate behind huge movie complexes.  They own 80 different theaters throughout the country.  The space is rented to companies like AMC Lowes and Regal Cinemas.  You’ve probably seen a movie in one of their theatres.

Talk about a great business.

The company regularly boasts they’ve never had a late payment or vacancy in their 13 year history!

Now they aren’t perfect.  They tried to expand outside the movie business into water parks, wineries, and resort development.  Management’s exiting some of these deals so they can stick to their knitting – movie theaters.

Despite the misstep, the company is thriving.  EPR stock has doubled in the last year.  And growing movie attendance should keep pushing it even higher.

They have a $1.8 billion market cap and the company recently paid a $0.65 quarterly dividend.  That’s about $2.60 per share a year or a yield of just over 6%.  Not bad when the best you can get at the bank is a sad 0.5%.

Take a look at this unusual REIT.  EPR is different than all the others, but they could provide big returns to shareholders.

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Category: Bonds

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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